Solutions 30 SE (S30) Earnings Call Transcript & Summary

Hello, and welcome to the Solutions 30 2020 Half Year Results Call. My name is Courtney, and I'll be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] And I will now hand you over to your host, Gianbeppi Fortis, Chief Executive Officer, to begin today's conference. Thank you.

Thank you, Courtney. Thank you, everybody, for being with us today. I'm Gianbeppi Fortis, CEO of the company. And today with me, I have Amaury Boilot, our CFO; and Nathalie Boumendil, who is our Investor Relations. Let's begin at Page 4, Courtney, please. Just a few words on the first half of this year that has been quite exceptional because of COVID. We have done a lot of work in this first half on the governance, on the G part of ESG, on the governance of our company. And we have moved to the IFRS accounting standards, audited with new auditors. And then we moved the company to Euronext, and we had entered the SBF120 index last Friday, which has been quite an achievement for us. During COVID, as you have seen already, our revenues have remained quite strong. We grew double-digit in the first half, 14%. And then, of course, some of you may have had some doubts in terms of the profitability of the company during this first half. It's been not easy because we went from a base of 100 in February down to 65 in April, and then back again to almost 115 in June. So it's been a big up and down. But our model is quite robust and flexible. So we managed to keep our costs under control, produce them and then bounce back quickly. And it's in the same on the cash side, thanks to a tight cash control, we are coming up of this first half with a very strong cash position. In terms of topic now for the rest of the year and for the coming years as well, one important thing to notice is that June has been a strong month, but it's not been an exception. The month of July and then the rest of the third quarter had been very strong. Historically, the third quarter for us is -- it's quite a lot -- soft period of the year because of the holiday. It's not been the case this year. Less people have gone to holiday, and all of us have been working from home, needing a good internet connection. So the internet vertical of our offer has been very strong during Q2 -- during Q3. And this trend is continuing now, and we see it continue until the end of the year and also in the future. That is thanks to the packages that are now being implemented in the different European country with a lot of money going into the telecommunication infrastructure of our countries. And another important vertical being energy, that is also a beneficiary of quite a lot of investment from the different European countries. So the trends that we saw before COVID in terms of our environment moving towards more digital equipment and moving towards green energy are now even stronger than before. We have had a very strong sales pipe, even during COVID and then after COVID, that has continued. Within particular wins in terms of 5G activities, new contracts for charging station deployments and also strong M&A pipe. We put all the M&A activity on hold. But now we are happy to resume with a pipe that is quite full. There is another interesting thing to notice with these packages that are coming into place in the different countries, is that we are also going to take advantage of some initiatives in terms of the lower taxes and charges on salaries and some subsidies for the recruitment of young people, which we do quite a lot every year. Having said that, I'll let Amaury continue with the figures on Page 5.

Thank you, Gianbeppi, and good afternoon, everyone. Well, as you can see on this snapshot of our financial performance, the group managed to limit the impact of the lockdown and this unprecedented pandemic over the first half. Actually, for the first 6 months of 2020, revenue was up by 14% in comparison with the first semester of 2019. Maintenance activities, which are actually the recurring part of our business, acted really as a buffer during this period. The EBITDA stands at EUR 41.5 million and represents 11.4% of our revenue in comparison with 12.7% in June '19. This level of profitability actually mainly results from the adaptation of our cost structure and the implementation of partial activity measures in order to absorb the drop of volumes during the lockdown. Over the period, the group also improved its financial structure. As Gianbeppi said, at the end, we applied a tight cost control all over the period. And at the end of June, we had a -- have a cash position exceeding our bank debt by EUR 45.9 million. And if you include in this financial debt all the purely accounting debts related to IFRS 16, the net debt of the group stands at EUR 26.7 million. So as a result of this cash control and this close monitoring of the cash, as you can see, the free cash flow is very high and stands at EUR 78.4 million at the end of the first half. This free cash flow is mainly explained by the acceleration of payments from our customers, which helped us actually to reduce significantly our working capital needs. If we go now on Slide #6 and look at the revenues that we disclosed in July. Revenue over the first half of 2020 increased by 14%, going up from EUR 318.8 million, up to EUR 363.7 million, with the organic growth representing 50% of this growth. So obviously, due to the lockdown, this growth was a bit lower during the second quarter of the year in comparison with the first quarter. This growth reached 10.6% during the second quarter of the year. And as I told you earlier, the recurring activity, which actually represented 64% of our revenues during this first semester, actually helped us to absorb the shock due to the lockdown. What you can notice also on the graph on the left, that all the geographical segments contributed to this increase in revenue, even if the impact of COVID was very different from one country to another. France increased its revenue by 10.3% up to EUR 224.3 million. The revenue in Benelux went up from EUR 58.5 million up to EUR 66.2 million, growing by 13.2%. And in the other countries, the revenue went up by 28.2% and reached EUR 73.1 million. Now looking at the P&L on Slide #7. Well, you can note that the EBITDA margin stands at 11.4% at the end of June '20. So we had a limited impact on our EBITDA margin due to this COVID crisis. And this performance mainly results from our cost control and from the adjustment that we made in order to scale down our operations in order to adapt to the drop in the revenue during the lockdown. Actually, to absorb the impact of this drop in volume, we actually used 2 levers. First lever was temporary unemployment measures for the technicians that could not work during this period, and the second lever was a decrease in the level of subcontracted activity. What you can note also on this slide is that central costs or the costs related to central organization cannot be adjusted in the same proportion. And that's basically the place where we decreased a little bit our profitability over the first half. Please note also that in the cost of central organization, we included all the costs related to our IFRS transition and our move to Euronext, which amounts for approximately EUR 1 million and which are considered as recurring costs in this P&L. In line with the limited decline of the EBITDA, the EBIT stands at EUR 21.8 million and represents 6% of the revenue. It includes EUR 8.9 million of operating depreciation and amortization as well as EUR 11.1 million related to the right-of-use of leased assets, the amortizations are related to the leased assets according to IFRS 16. On the next slide, you have a zoom on the profitability of the different geographical segments. So basically, everywhere, in all the geographies, the EBITDA margin is below the normative level. In France, the EBITDA margin decreased by 1.5% between June 2020 and June 2019, which is pretty much in line with the decrease that we noticed at group level. In Benelux, so if you look at this graph, apparently, you can note that the EBITDA margin increased from 10% to 14% over this first semester. But this is actually related to a base effect because back in 2019, we were still in a ramp-up phase with Telenet, this big contract that we signed in 2018, but we're still in a start-up phase. But even with 14%, Benelux is below its normative level that we usually have now in this geography. Regarding the other countries, actually, there were several effects impacting the profitability. First, South of Europe, Italy and Spain, notably, were very impacted by the pandemic. So lockdown was longer, and the drop in revenue was stronger. So this had an impact on the profitability of this country. Germany keeps having a single-digit profitability mainly because we still have not reached the critical size in this country, and the situation in Poland is different. We are still there in the start-up phase, and that is why profitability will go up progressively. Going back to the P&L on Slide 9. So below the EBIT, you can note the amortization of intangible, which amount to EUR 5.7 million. They are actually related to client relationships. And the increase in this position actually reflects the M&A activity that the group performed over the second half of 2019. Below, you can also notice that the financial result increased quite significantly, and the financial expenses almost doubled in comparison with the first half of 2019. This is mainly explained by changes in the FX rate between the euro and the local currency used in Poland and Tunisia. And taking all these elements into account, then the consolidated net income of the group stands at EUR 10.5 million at the end of June 2020 against EUR 15.5 million in June '19. Now if we look at the balance sheet structure, what you can note is if we compare the balance sheet at the end of June with the balance sheet at the end of December, you can see that the debt increased by EUR 18.8 million, this bank debt now stands at EUR 105.9 million. And this increase is mainly related to some -- to the payment of some earnouts and the acquisition of assets from Elmo in Poland at the beginning of the year. You can also see on this slide that the cash increased very significantly over the period, going from EUR 84.2 million up to EUR 151.8 million. And this significant increase is particularly related to the change in working capital since we managed to decrease very significantly our working capital needs, going down from plus EUR 8.7 million to minus EUR 40.4 million. And again, this improvement of working capital is mainly related to the acceleration of payments that was -- that were granted from our customers. Another evidence of this acceleration of payment is the outstanding amount of receivables that we sold to factoring providers, is the amount of factors actually decreased by EUR 11 million over the period because of this acceleration of payments. Going to the next slide. And if we look at the cash flow, cash flow statement summary, as told earlier, Solutions 30 had a strong free cash flow generation over the first half of EUR 78 million, and this includes a cash flow from operation amounting to EUR 35.3 million. We have a positive change of the working capital, representing a gain of EUR 49.1 million in terms of cash. And over this first half, obviously, we limited our investments, our organic CapEx to EUR 6 million, amounting to 1.6% of our revenue in this period. Then regarding the acquisition of Elmo and the earnouts that we paid, we invested over the period EUR 17.7 million that we financed through additional loans for a similar amount. On the top of that, you need to add the impact of IFRS 16 and all the expenses related to these leasing costs, which are classified into financial investments according to IFRS 16, for a total amount of EUR 11.2 million. And that's how we managed to increase our cash position from EUR 84 million to EUR 152 million at the end of June 2020. I'm think I'm done with the figures. So maybe Gianbeppi, I will leave you the floor for the outlook part.

Thank you, Amaury. Courtney, we are on Page 13. Here, we just try to put on a single page what happens in the different geographies as part of the main drivers of our activity are concerned, smart meters, charging stations, fiber, 5G and then the willingness of clients to outsource their activities and consolidate -- and get the market consolidated. At the end of the day, these opportunities and all of these activities are present in all of our geographies, but we try to be a little bit more explicit. It's not easy. So if you look carefully, you will see that the smart meters, for example, are less of an opportunity in south of Europe, with Spain that has already done most of the job. France, a lot has been done. There is, as of today, a little bit more than 27 million electricity meters deployed out of a total of 35 million, so the project is not finished, but it's well underway. And Italy is under second deployment and the first was done already a few years ago. This is the second generation, but it's coming slowly in small bits and pieces. So it's not an opportunity as significant as in the other geographies. All the rest, all the other opportunities are still there. And here with smart meters, what we are saying here is that the mass deployments are not going to be significant in Italy, Spain and France in the coming years. But the maintenance activities and all the other activities that are related to infrastructure that is going to be there for some tens of years are going to be present. So that does not mean that we will not work in France, Spain and Italy in future. Page 14, Courtney, please. So in a nutshell, I think that in the first half, we have proven that our activity is quite resilient. I mean people need our services even more so now that lots of people are working from home, that our model is flexible. We dropped our revenues by 35% and then bounced back by almost 100% in a matter of months. And we have done it without losing cash and preserving our margins. And in terms of dynamics that are in our main verticals, they are today even stronger than before, with recovery plans that are launched in all of the geographies. And on top of that, our clients that were already willing to outsource the activities before COVID are even more willing to do that now because they are looking for opportunities to reduce their costs. So given all of this, we reiterate our objectives, and we are confident in the fact that we will reach EUR 1 billion of revenue soon, with the 2020, that is going to be a year of double digit and profitable growth, like in the past. With this, I'm done. And I think now it's the moment for Q&A. So please go ahead with your questions.

[Operator Instructions] And our first question comes in from the line of Charles Lepetitpas calling from ODDO.

Two questions on my side. So first, in the next, let's say, 2 years, what is the range of capital that you intend to deploy for acquisitions? Or maybe if you prefer to talk in terms of leverage, say, in net debt-to-EBITDA terms, up to which level are you willing to go? And secondly, if you could please provide us with an update of where you stand in terms of main clients and the panorama of competitors in Germany.

Okay. Maybe I can begin with the first part of the question, then maybe let Amaury comment and then go back to Germany. So first part of the question is how much we want to allocate to M&A. I think the constraint is not so much on the cash side because we have a lot of leverage available. We have a positive cash situation at the moment. And so we have room for using that leverage. Maybe Amaury, you want to comment because we have done some talks with our banks in the past days. And I am wondering if you can give a feeling for the kind of leverage that we need to accept now using IFRS as standard for EBITDA?

Yes. Well, actually, currently, for us, it is possible to go up to a leverage of 3x if you take the ratio between our net banking debt. So if you include only the banking debt over the EBITDA, so we can go up to 3x our EBITDA level in terms of net debt. So currently, we have a negative bank debt, minus EUR 45 million. So we -- for us, this ratio will not be a constraint in the future. The question is more to find the right target and then we'll allocate the money to this. But it is not a limit. And regarding your question about investments, we -- currently, in our pipe, we have the targets that are -- that have similar size of the acquisition that we made before.

Thank you. Thank you, Amaury. So okay. So Charles, as in the past, cash is not going to be the constraint on the M&A. It's more of a capability to find good targets and then integrate them. Now concerning Germany, yes, it's a good question because, as I said before, there is these packages that are going through all of Europe for investment in infrastructure. And there is a big package that has been voted in Germany. But at the moment, we have not seen concrete things coming down to the field, to the market. So our clients seem to be slow to react. I'm talking in particular about investments in fiber. At the moment, what we are seeing is more cities organizing themselves than Deutsche Telekom beginning. So I would say that it's a country that is going to inject a lot of money in our verticals. So we are pretty sure there will be good opportunities. But at the moment, we don't see them. I would say that it's the slowest geography across all of the geographies that we cover. So at the moment, no exceptional news on the Germany side.

[Operator Instructions] And our next question comes in from the line of Johannes Ries calling from Apus Capital.

Sorry, yes, my line was muted. Maybe regarding your growth opportunities, can you maybe update us a little bit on the topic of 5G rollout and EV charging stations? You mentioned Germany is as low as maybe we are also the slowest in EV stations or they want to push out electrification of -- on the car side. We don't build the infrastructure. But I heard from other guys who makes a cooling of charging stations that the things moving slower than expected, especially in the high-speed charging. And also on 5G, on the other side, we hear a lot of -- on investments, therefore, a little bit maybe how the things are evolving in the different markets and these new areas for you.

Yes, absolutely. Okay. So let me comment on this. I'll begin with 5G. There has been some announcements during COVID. I don't know if you have noticed, but Spain has made quite a lot bold announcement saying that they are capable to a 5G all across the country by the end of 2020. It's is a little bit of an announcement effect. They are not referring to real 5G, they are referring to 4G plus, basically an extension of 4G. It's not the real 5G, but they are willing to push and push high. Yes. Other countries have been a little bit more shy in terms of announcements, but the initiatives that we were seeing at the beginning of the year, only in Spain, with work on the existing 4G side, now they are coming to the other countries. So at this moment, we are answering to some tender offers, I would say, in all of the geographies. So this activity is coming. 5G activity is coming across Europe. Now concerning the energy sector, sales of cars have been very good in July and August, thanks to the subsidies. And this is true in all of the countries, in particular, in France and also in Germany. So now the countries are a little bit slow to react, but this thing is also coming. And we have a sales pipe. I mean, we have lots of discussions with companies that are deploying charging stations, being utilities, being car manufacturers, being leasing company, really lots of actors that are pushing that. So I think it's just a matter of time. But the topic is really becoming something concrete for us in all of the geographies. And related to that, there is something else that we have begun to see talking to the utilities is that European countries are simply not capable to absorb all the utilization of electricity that is going to be taken by this charging station. That means that if you have a building, and several inhabitants of the building want a charging station in the garage, they are not sure that they -- we keep the charging...

I confirm this. Yes.

Yes. Yes. It's happening. I know some people that have that issue. So -- and this is big money. It's big money for a country because if I have the numbers of France in mind because it's the old country. But about 1/3 of the inhabitants of the apartments of the houses of the country are in collective buildings. So equipping that with a new shift with -- for the distribution of electricity is a big thing. So there is these things that are coming. It's taking some time, but we are clearly seeing that it's going to be a big driver. You have to remember that the car manufacturers now are going to pay fine in 2021 if they do not meet the CO2 emission targets that are being set by the European community. So now they are putting pressure on the utility to put this infrastructure in place. Utilities are not the fastest companies of this world. So it's taking some time, but it's coming. I began seeing some advertising of charging stations done by utility. So we can see that the thing is coming.

Okay. Maybe another question to your regional expansion. I saw even from our door in the comments this morning, you are also targeting now U.K. When we can expect maybe the first step to U.K.? It's also one of your acquisition targets, I think maybe to on this market.

Yes, absolutely. We are talking to a certain number of targets, and we are also talking to some clients, potential clients, first of which, of course, is Bridge Telecom and Openreach. We are now very close. The only question now is COVID, just COVID. The second wave is coming, and we just don't want to go ahead lowering our ads and then immediately getting into a lockdown situation. So we are -- yes. So we are a little bit careful, but we are very close from -- to begin in the U.K. because U.K. is launching an aggressive plan of investment. I think one reason is tax, the other is COVID and now the 2 are combined together. So we are seeing serious plan for investment in vertical that are interesting for us, telecommunications being the first one and us being the second one. So we are very close. I don't promise 100% that we are going to do it in the coming 3 or 4 months, but if it's not at the end of 2020, it's going to be beginning of '21. So we are very close.

Okay. And that's the main focus of regional expansion. The other wide parts on the Western European card are not in the focus like Switzerland or Austria or Nordics or so?

No. No because we prefer to focus on large geographies. U.K. is the large one that is missing. Our footprint is 60 million people. So we want to be there. And now with these plans that are voted is the right time. So basically, if the train starts, we want to be on the train.

We will move to the questions from the webcast.

Okay. So I see the first question is for you, Amaury. Please, can you explain the large change in working capital?

There are actually several questions about the working capital. So I will try to -- a complete summary -- a complete answer on this topic. So actually, yes, we had a very positive change in our working capital. This positive change amounted to EUR 49 million over the first half. So as indicated, the main explanation about this improvement is related to the acceleration of payments from our customers. We had a decrease of our receivable position of almost EUR 40 million. And why did the client accepted to accelerate the payment? Actually, it was not a favor for Solutions 30. We are working with big telecom operators, big utilities, which are actually close to the government. And they had a strong incentive to help serve subcontractors. And as our competitors are, in many cases, much smaller, they had more difficulty to manage this lockdown period. So basically, they accelerated the payments for all the subcontractors, and we benefited from this acceleration as well. So EUR 40 million coming from the acceleration of payments from customers. And the second lever is also the postponement of the payment of some social charges and VAT. But we postponed at the beginning of the lockdown the payment of some VAT and social charges. But we almost repaid everything before June. And I think the outstanding position at group level at the end of June was only EUR 8 million at this time. So this is an additional lever. But our tax payables and all the payables related to social charges are actually lower at the end of June than they were in December. So the impact of this was quite limited. And the third factor is actually related to the fact that we managed a significant part of our growth through subcontractors. And with subcontractors, this gives you an additional delay of payments because you can pay your subcontractors at 30 days. So we respected the payment terms of our subcontractors, all along the prices and even accelerated the payments when necessary for some of them during the lockdown. But we got an additional EUR 10 million payables at the end of June related to that because if you hire a technician and the technician is on your payroll, then you need to pay at the end of the month. If you work with the subcontractors, you need to pay at 30 days. And I have another question about the evolution on the second half. So obviously, the working capital should normalize. We have applied as from March very tight control -- cost control procedures. And now we are following and monitoring all the costs very closely. So I feel that this best practice will continue across the group. So we should definitely improve our working capital on the long run. But the levels should normalize because clients will now go back to the normal term of payments. And so you can expect a decrease of the working capital -- or an increase of the working capital need, sorry, in -- on the second half of 2020.

Amaury, we have another question related to that, which is profitability in second half. Is it going to be similar to the one of 2019?

Yes. Actually, we expect a strong H2, except if we have another lockdown period. But what we have seen over the Q3 is profitability back to normative level, which is very similar to the level of profitability that we had before the lockdown.

And then we have 2 questions concerning fiber. The first one is fiber in France. And the question is, how many fiber connections we are installing now. And I do not have the answer, but Amaury, you can check if you have it. And then I can take care of the second question, which is, are you seeing any progress relating to fiber in Italy? So that I can answer. And the answer is yes. There is now talks to create one unique company that is going to deploy fiber across the country. It is going to happen. Now the state -- the government has taken a strong stance towards both NM and Telecom Italia. So it's going to happen, but it's going to take time. So we should expect something, I hope next year. The very good news is that in the meantime, Telecom Italia has made a deal with KKR to deploy fiber. And now they are calling the partner companies, and they are beginning to prepare plans, real plans. I will not repeat the volumes that are forecasting because they are most of volumes, and I don't believe them. But I believe that we are going to see a push in fiber in Italy next year for sure. I still don't know exactly how big and exactly when, but it's certainly in 2021. Amaury, have you found the answer to that first part of the question, how many fiber connections today in France?

So I have to give you the number of clients installed for the moment. But on the first half, our revenue related to fiber activities across the group was EUR 148 million. And only France, representing almost EUR 135 million of revenue.